Question

Answer all the following questions and problems in a single Microsoft Excel workbook. Use a separate worksheet for each problem and label each worksheet tab with the appropriate question number. Label all inputs and show all your work. Use formulas and functions in Excel to calculate your answers. For short essay questions, use complete sentences, proper paragraph structures, and correct grammar, spelling, and punctuation. This is an individual assignment; group work is prohibited. Your completed answers are due in the D2L dropbox by 11:30am (CT) on Thursday, April 9, 2020. 1. Disco Volante, Inc., is considering the purchase of a new commercial oven. The original cost of the company's existing oven was $100,000. The machine is now 10 years old and has a current market being depreciated over a 15-year life toward a zero estimated salvage value on a straight-line basis. Management is contemplating the purchase of a new oven that costs $125,000 with an estimated salvage value of $10,000. Expected cash savings from the new oven are $25,000 a year (before tax), and the oven will allow the company to reduce working capital by $10,000. Depreciation is on a straight-line basis over a 5-year life, and the cost of capital is 8.25%. Assume a 21% tax rate. a. What is the net present value of the new machine? b. Should the replacement be made?

Answer 1

SOLUTION:-

a). calculation of NPV

Calculations:-

1). old oven

orginal cost =$100000

current market price = $50000

expected life =15 years

depreciation per year =$100000/15 years

=$6667 per year

accumulated depreciation = $6667 * 10 (age of oven)

= $66670

book value =orginal cost - accumulated depreciation

= $100000- $66670

= $33330

gain on sale of old oven = market rate - book value

=$50000- $33330

= $16670

taxable amount on gain = $16670 * .21 (tax rate)

= $3500

net cash flow from sale of old oven = market vaue of oven - taxable amount on gain

=$50000- $3500

= $46500

2). depreciation

depreciation of old oven = $6667 per year

depreciation of new oven is calculated as follows:-

purchase price of new oven =$125000

expected life =5 year

depreciation per year =$125000/5 years

=$25000 per year

Net incremental depreciation = d epreciation of new oven - depreciation of old oven

= $25000 - $6667

=$18333

Net incremental depreciation tax shield = $18333 * .21 (tax rate)

= $3850

c).    After- tax  expected cash inflow from operation

   = expected cash savings * (1- tax rate)

=$25000 * (1-.21)

=$19750

d). After- tax  expected cash inflow from sale of new oven

after tax cash inflow = price * (1- tax rate)

= $10000 * (1-.21)

= $7900

	year0	year 1	year 2	year3	year4	year5
Initial Investment in Equipment	(125000)
decrease in working capital	$10000
Cash received from the disposal of old oven	$46500
release of working capital						(10000)
After-Tax CF from Operations		$19750	$19750	$19750	$19750	$19750
Depreciation Tax Shield		$3850	$3850	$3850	$3850	$3850
after-tax cash flow from the sale of new oven						$7900
Total After Tax Cash Flows	($68500)	$23600	$23600	$23600	$23600	$21500
PV of $1 Factor for 8.25%	1	.924	.853	.789	.728	.673
Discounted Cash Flow	($68500)	$21806	$20131	$18620	$17181	$14470

NPV = Sum of discounted net cash inflows – initial investment

NPV = (21806+20131+18620+17181+14470)-68500

NPV = $92208 - $68500

NPV = $23708

b).  Disco Volante, Inc. Company should purchase the new comercial oven because the net advantage of purchasing is $23708. In other words,Disco Volante Company’s net present value will increase by $23708 if it purchases the newnew comercial oven.